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Policy Reference
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Developing ODA Evaluation Methodology for Technical Cooperation
With the expansion of Korea’s official development assistance (ODA), there is a growing demand for systematic management and effective evaluation. However, the evaluation of Korea’s ODA mainly depends on guidelines and manuals d..
Eunsuk Lee et al. Date 2022.12.30
ODA, technical cooperationDownloadContentSummary<With the expansion of Korea’s official development assistance (ODA), there is a growing demand for systematic management and effective evaluation. However, the evaluation of Korea’s ODA mainly depends on guidelines and manuals designed for project-type interventions, while there is a lack of research on evaluation methodology for other types of ODA. Specifically, there are significant limitations when applying project-type ODA evaluation methods to technical cooperation (TC), including policy consulting and training.Therefore, this study investigates evaluation methods in consideration of the characteristics of Korea’s TC projects and the evaluation environments of its ODA implementing agencies, aiming to design a practical and useful evaluation framework for Korean TC interventions. To this end, it reviews the current trends in TC, discussions of ODA evaluation, and challenges in developing an evaluation methodology for TC projects.As shown in Chapter 2, the proportion of TC projects in Korea’s ODA is higher compared to other OECD DAC donors. However, these projects tend to be short-term and small in scale, with 14 out of 31 agencies implementing TC projects with funding of less than KRW 1 billion, or well under USD 1 million. In the case of small-sized TC interventions, the outcomes are often intangible and long-term, posing challenges in determining when and how to measure project results. As such, it is important to consider the evaluability and utility when selecting TC projects for evaluation, aligning with the recent trend that emphasizes the learning opportunities and usefulness derived from evaluations.Chapter 3 examines the evaluation systems and cases of six multilateral organizations and four bilateral development agencies that carry out TC projects. It has been demonstrated that major donors are addressing the constraints of TC evaluation by reducing the formality and burden associated with evaluations. While formal evaluations are carried out for projects with high evaluability and utility, simplified evaluations that review and validate project completion reports are also on the rise, especially at multilateral institutions. Another important aspect is that comprehensive evaluations are conducted for projects within a similar policy, program, or sector. Most evaluation design is based on theory of change (ToC), in which qualitative analysis and indicators are frequently used due to difficulty of quantifying the effects and outcomes of TC projects.Chapter 4 presents an in-depth analysis of the characteristics of Korea’s TC evaluation, with a specific focus on development consulting and training programs. In most cases, performance indicators were defined as the number of outputs or satisfaction scores, but these scores often fall short in accurately representing project outcomes. Alternatively, it would be more effective to collect detailed qualitative information from participants in evaluating the quality of the project content, knowledge transfer or collaboration methods, and gather opinions to contribute to project improvement. In comprehensive evaluations that cover multiple projects, establishing clear evaluation objectives would enhance the usefulness of evaluation results.Based on the findings mentioned above, this study presents the following implications for Korea’s TC evaluation. Firstly, it is necessary to set the scope of project results in consideration of the evaluability of TC projects, and employ representative indicators that can provide useful evaluative information on the project processes and quality. For short-term and small-scale projects that have relatively low utility in evaluation, it is advisable to consider conducting clustered evaluations when necessary. In cases where a formal evaluation is not possible, a cost-effective and simplified evaluation can be utilized to ensure accountability and provide learning opportunities. Lastly, it is crucial to clearly define the purpose of evaluation in order to determine the timing and scope of evaluation, as well as whether to involve an external consultant.Building on this analysis, Chapter 5 proposes a TC project management and evaluation system consisting of four steps that can be used for Korea’s typical TC activities. The first step which is a prerequisite is to collect project information and data through systematic monitoring throughout the project implementation. Secondly, upon project completion, the project team conducts a self-evaluation as part of the final report to assess the experience and lessons learned during the project implementation that can be accumulated as organization knowledge. Thirdly, a simplified end-of-project evaluation is carried out in which an external evaluator verifies the quality of the project completion report and the self-evaluation. As the final step, an ex-post comprehensive evaluation may be conducted by grouping selected TC projects based on specific needs.This step-by-step evaluation mechanism enables small-scale ODA-implementing agencies to conduct evaluations with limited funding while maximizing the utility of the evaluations. To ensure the effective implementation of these measures, each implementing agency should clearly define the purpose of evaluation and establish a comprehensive management system for TC projects. Additionally, TC evaluation should emphasize the identification of project strengths, weaknesses, and areas for improvement by incorporating a range of qualitative measures alongside quantitative outcomes. The Committee for International Development Cooperation is recommended to encourage flexibility in the methods of TC evaluations, and provide quality standards for TC projects, enabling each implementing agency to independently manage the quality of its projects. -
A Study on the Cooperation between Mekong Subregion and RoK to Build Stable Supply Chains in Southeast Asia
The Mekong subregion emerged as the core of the global value chain (GVC) with the influx of foreign direct investment. This is because the Mekong subregion’s economy is growing rapidly and is a strategic point in the face of the ..
Sungil Kwak et al. Date 2022.12.30
economic security, economic cooperationDownloadContentSummary<The Mekong subregion emerged as the core of the global value chain (GVC) with the influx of foreign direct investment. This is because the Mekong subregion’s economy is growing rapidly and is a strategic point in the face of the U.S.-China hegemony competition. Korea is also recognizing the importance of the Mekong subregion and carrying out cooperative activities. This study examines whether Korea’s supply chain can be diversified through the Mekong subregion. Considering the development situation and infrastructure conditions of the Mekong subregion, it will be difficult for the Mekong subregion to function as a target for Korea’s supply chain diversification in a short period of time, but we will preemptively explore Korea-Mekong cooperation measures to explore the feasibility.To this end, Chapter 2 examines the GVC policies promoted by major developed countries such as the U.S., China, and Japan and the Mekong countries’ own GVC policies. The United States, China, and Japan are promoting various cooperative strategies and initiatives for the Mekong subregion. First of all, the United States, promoting the “Mekong-U.S. Partnership,” is paying attention to economic integration, human resource development, and non-traditional security in the Mekong subregion. China is also promoting Mekong cooperation with interest in linking the Mekong subregion and the southwestern part of China mainland through the Lancang-Mekong Cooperation (LMC) initiative. Meanwhile, China revised the FTA with ASEAN in 2016 and was active in entering into force of RCEP. After the global financial crisis, Japan has established a Comprehensive Asian Development Plan (CADP) that encompasses the Mekong subregion and India and supports the incorporation of global networks in these regions by maintaining wide-area infrastructure and creating industrial complexes. Meanwhile, Japan began to disperse production bases in Asia in 2012 and launched its “China+1” strategy in earnest. In addition, Japan has established “AJIF” in 2022 to foster ASEAN, including the Mekong region, as a hub for the global supply chain. It is also expanding support for Japanese firms to diversify their overseas supply chains.The five Mekong countries seem to be taking part in the Global Value Chain (GVC) and the ASEAN Regional Value Chain (RVC) as key measures of economic growth. Each country in the Mekong subregion has different strategies and methods for participating in GVC and RVC. The GVC strategy of Mekong countries can be summarized as the followings; one is to encourage GVC participation directly, and the other is to upgrade the industrial structure indirectly. As in the case of Vietnam and Thailand, the policy to encourage GVC participation appears to be pressure for FDI firms to expand transactions with their own local firms. The indirect strategy to expand GVC participation is to make GVC production length longer through product advancement and expand international division of labor for production. To this end, Mekong countries are implementing the industrial policies to upgrade their economic structure.Chapter 3 explored the inflow of FDI to five countries in the Mekong subregion. Japan, Korea, the United States, and China invested heavily in the Mekong region. They mainly invest the energy, construction, and information and communication, and electronics sectors. In Cambodia, Korea’s FDI went mainly to a finance and insurance industries. Electricity, gas, steam, and air conditioning supplies in Laos, mining in Myanmar, and manufacturing in Thailand and Vietnam are the main sectors on that Korea’s FDI has focused. As a result of analyzing the effect of foreign direct investment on export value-added based on the gravity model proposed by Tinbergen (1962), the main variables of interest in the study, FDI inflow and value-added exports, generally provided an significant evidence to have a positive relationship. In addition, the estimated coefficient of FTA on export added value was mainly estimated to be negative, and PTA, a preferential measure provided by relative developed countries to relative developing countries, was mainly estimated to be positive.In addition, Vietnam has quickly participated in GVC, but participation in ASEAN RVC progressed slowly. Thailand was slowly expanding both GVC and RVC participation. Cambodia, on the other hand, was quickly participating in GVC by 2020, and Laos was more actively participating in RVC than GVC. Meanwhile, in the 2021 data, the RVC participation rate in all four Mekong countries increased significantly. The reason is understood to be that firms located in the ASEAN region recognized the importance of supply chain stability and diversification of their procurement sources. Meanwhile, the proportion of using domestic value added in total exports was different for each country in the Mekong subregion. Laos used the largest proportion of domestic value added among the Mekong countries in value-added exports, while Vietnam’s share of domestic value added in total exports was gradually decreasing. In addition, the four Mekong countries had a lower utilization rate of own intermediate goods in the low- and medium-high-tech manufacturing industries. This result suggests that the demand for technology transfer in the manufacturing sector of Mekong countries may increase further in the near future.Chapter 4 surveyed Korean firms that entered the Mekong subregion to diversify their supply chains. The survey investigated the current status and changes in procurement and production structure, and explored the demand for supporting policies for Korean firms working in the Mekong subregion. According to a survey of difficulties in building value chains between local firms and Korean firms, Korean firms reported a lack of quality and technology competitiveness, poor logistics infrastructure in the Mekong subregion, and lack of local raw materials and parts. More than 40% of all respondents answered that the U.S.-China hegemony competition and protectionism negatively affect the value chains (supply chains) of Korean firms working in the Mekong subregion. In addition, respondents predicted that it would have a more negative impact after two to three years. According to the survey, only 62% of all the respondents were aware of the RCEP settlement. There is still a lack of publicity of it for the firms. Meanwhile, firms responded that they need more supports such as providing non-face-to-face FTA consulting, issuing certificates of origin, resolving difficulties in overseas customs, and responding to non-tariff measures.Finally, the survey asks the Korean firms to evalate Korean government’s supporting measures. Korea firms showed a weak correlation between recognition and utilization of supporting measures. In other words, it was found that some Korean firms are not aware of the existence of the measures just before they utilize it. Or, other firms arbitrarily utilize them when they needed. Meanwhile, among the supporting measures, there were many cases where the two supporting measures were selected at the same time by Korean firms. Policy efficiency can be improved if these supporting measures are packaged rather than provided separately.The respondents evaluate the importance and urgency of the Korean government’s supporting measures. Respondents reported that expanding logistics infrastructure using ODA is the most urgent and important to expand the value chains into the Mekong subregion. This suggests that when expanding their value chains to the Mekong subregion, Korean firms consider the capabilities of the local firms as well as the quality of socio-economic infrastructure in that region.Based on the above research results, this study proposes the cooperation directions between Korea and the Mekong subregion to stabilize the Korea-ASEAN value chain. First, it is important to promote cooperation policies consistently to build trust. “The Han River-Mekong River Declaration,” announced in 2019, also emphasized inclusiveness, prosperity through experience sharing, and peace, while the “Korea-ASEAN Solidarity Initiative”, announced in 2022, also mentions inclusiveness, trust, and reciprocity as cooperation principles. Second, it is necessary to strengthen comprehensive cooperation across all sectors rather than focusing only on the economic sector. In a market economy, it is also important to seek common interests by promoting regional order and to seek peace from traditional and non-traditional security threats. In addition, it is necessary to strengthen socio-cultural exchanges in order to increase mutual understanding between the two regions. Third, it is necessary to prepare a cooperative plan that reflects the demand of the Mekong subregion. Fourth, it should be expanded to support for the establishment of economic and social infrastructure in the Mekong subregion.Finally, this study proposes seven ways to cooperate between Korea and the Mekong subregion based on the directions of the cooperation. As confirmed in Chapter 3, except for Vietnam and Thailand, Mekong countries have not yet had industrial capacity to build stable value chains. Therefore, in order for the Mekong subregion to become the partner of stable supply chain, Korean firms must increase the volume of trade with the multinational forms or local firms located in the Mekong subregion.First, using ODA funds, it is necessary to establish ‘a risk response manual’ for each country in the Mekong subregion and to enable Korean firms to use it under the sudden crisis such as infectious disease, climate disaster, and economic crisis, It should be considered that not only are the Mekong countries themselves vulnerable to crises, but also that most of the Korean firms that have recently entered the region are small and medium sized firms.Second, it is possible to establish a think tank dedicated to the Mekong subregion by Korean government. Until now, most information related to the Mekong subregion has been obtained from data from leading regional cooperation countries such as Japan, the United States, and China. The limitations of information on the Mekong subregion worked as difficulties in finding how to link value chain effectively between Korea and the Mekong subregion. To compensate for this, we may consider the establishment of a Korean-led think tank in the Mekong subregion.Third, it is possible to consider the installation of the ‘Mekong-Korea Society.’ We have to foster it as an international organization that plays the similar role as the Korea-ASEAN Center in cooperation with Korea and the Mekong subregion. In particular, if all stakeholders, including the governments of both regions, private organizations, public institutions’ representative offices, and local governments, participate in it, the synergy of cooperation can be amplified. It is expected to function as a platform for comprehensive cooperation that encompasses economic, industrial, social and cultural exchanges, and educational and technological cooperation between the two regions.Fourth, it is necessary to magnify trade by improving the utilization rate of FTA and RCEP between Korea and the Mekong subregion. As analyzed in Chapter 3, it was confirmed that the FTA settlement was a significant variable along with an increase in FDI inflow in participation in GVC. In particular, the use of preferential trade agreements (PTA) was an important means of increasing trade, given that the Mekong subregion includes underdeveloped countries such as Cambodia and Laos.Fifth, it is necessary to support the establishment of institutional infrastructure to respond to the demand for technology transfer. In Chapter 2, it was confirmed that countries in the Mekong subregion are increasing their demands for technology transfer through coercive policies to participate in GVC. In addition, as confirmed in Chapter 3, countries in that region had a low proportion of their own value-added utilization in the manufacturing sector. In response to the technology transfer needs of the Mekong subregion, it should be considered as supporting measures improving intellectual property rights and technology security-related systems in the Mekong subregion.Sixth, the effectiveness of supporting measures should be enhanced through packaging and strategic provision of them for stabilizing the value chain. In Chapter 4, it was investigated that when firms utilize the government’s supporting measures, whether to use it or not is determined by its necessity rather than knowing the existence of them in advance. On the other hand, when using government’s supporting measures, firms used specific supporting measures together at the same time. This suggests that packaging supporting measures can increase efficiency.Seventh, it is necessary to promote the use of strategic ODA and the development of infrastructure in the Mekong region through solidarity with Mekong-engaged countries such as the United States, Japan, and China. The solidarity with the major Mekong-engaged countries can lead the improvement of connectivity and infrastructure development in this area in an effective way. As seen in the survey in Chapter 4, Korean firms were also hoping to improve infrastructure in the Mekong subregion. Based on Korea’s strengths, such as its reliable infrastructure technology and capabilities of the world’s best e-government infrastructure and service, we will be able to make cooperation with the U.S., Japan, and China. -
Covid-19 Crisis and Shifts in the Corporate Competitive Landscape: Comparisons with Previous Economic Crises
In terms of economic fluctuations, it is well recognized that the effects of an economic crisis have a detrimental impact on the entry, growth, decline, and exit of firms. In addition, the magnitude of the impact varies both withi..
Sang-Ha Yoon et al. Date 2022.12.30
economic growth, industrial policyDownloadContentSummary<In terms of economic fluctuations, it is well recognized that the effects of an economic crisis have a detrimental impact on the entry, growth, decline, and exit of firms. In addition, the magnitude of the impact varies both within and between industries depending on the size and other characteristics of the firm. The economy is going through significant changes due to the emergence of new industries and the decline or disappearance of current ones. This study looks at how big economic events like the COVID-19 pandemic and the global financial crisis have affected businesses and industries. After completing a study at several levels of top international corporations, larger domestic enterprises, and domestic small and medium-sized businesses, it attempts to draw policy implications.In chapter 2, we analyzed changes in the activities and characteristics of large global firms using Global Compustat: Fundamental Annual data. Specifically, we presented basic statistics on changes in concentration and profit margins in three regions (Asia, North America, and Europe) and then examined how the economic share of large firms has changed over time and across crises. We also looked at the data by industry to identify heterogeneity. To understand the impact of changes in the economic weight of top firms, we examined how the characteristics of top firms have changed over the past 20 years. We looked at cost-to-sales, investment-to-sales, and R&D-to-sales as firm characteristics. Cost-to-sales is closely related to operating margins and markups, while investment and R&D expenditures as a percentage of sales have a significant impact on economic development, with differences between North American companies and those in other regions. After reviewing the changes in the ranking of larger companies, we found that North American firms were more likely to move up and down, while those in Europe and East Asia were less likely to do so. Finally, the regression analysis examined differences in business cycle sensitivity based on firm characteristics. The results showed that firms with larger sales and higher sales-to-cost ratios were less sensitive to cyclical fluctuations, i.e. larger firms were less sensitive to changes in GDP than smaller firms. Using sales growth in local currency terms, the top 500 companies were 20-30% less sensitive to GDP increases than the companies below them. We also found that higher cost-to-sales ratios (mark-ups) were associated with lower sensitivity to economic shocks when analysing companies with higher cost-to-sales ratios (the top 500 companies in the region) versus smaller companies (those below the 500). This means that companies with higher cost-to-sales ratios experienced about 20-40% less revenue decline when GDP fell.In chapter 3, we compared and analyzed the negative impacts of each industry in the 2008 global financial crisis and the COVID-19 crisis based on corporate sales, and diagnosed the asymmetrical impact on face-to-face and non-face-to-face industries during the pandemic for Korean listed firms. As a result, first, real sales of all companies fell by an average of 4.28 percent year-on-year in 2020, whereas real sales fell by 20.08 percent in 2009, shortly after the 2008 global financial crisis. This indicates that the intensity of the recession was greater during the 2008 global financial crisis than in the 2020 pandemic for listed firms. In other words, during the 2008 global financial crisis, corporate management activities shrank more significantly than during the 2020 pandemic crisis, and the economic recession lasted longer. Second, immediately after the 2008 financial crisis, all industries except mining, agriculture, forestry, and fisheries shrank. 2009 was particularly hard-hit with real estate and rental sales falling 87.73% compared to the 2008 average. In contrast, immediately after the 2020 pandemic outbreak, there was no significant decline in sales in other industries except for arts, sports and leisure services, transportation, agriculture, construction, wholesale and retail, accommodation and restaurant, facility management and business support services. Sales in real estate and rental actually increased by 52.25% compared to the 2019 average. Third, industries that were more affected by the 2020 pandemic crisis than the 2008 global financial crisis included (ⅰ) agriculture, forestry, and fishing, (ⅱ) mining, and (ⅲ) arts, sports, and leisure-related services. Whereas, all 12 other industries experienced a greater imparct from the 2008 global financial crisis. Fourth, the impact of COVID-19 was asymmetric in the face-to-face and non-face-to-face industries. In the case of non-face-to-face industry sales, the deviation rate was -3.37% in 2020 compared to the 2019 average, while face-to-face industry sales were -12.50% in 2020, showing a greater decrease compared to the 2019 average. Fifth, the gap between the non-face-to-face and face-to-face industries was even greater, recording an average of -16.12% and -0.12%, respectively, showing a much larger drop in the face-to-face industry.The second part of chapter 3 focused on smaller companies and examined the characteristics of their regional and industry licensing rates and closing rates through local administrative licensing data. Amid significant patterns by industry and period, the trend was stronger than the economic fluctuation in the entire period after the Asian financial crisis, and the licensing rate was systematically higher than the closing rate. This suggests that the competitive strength of small and medium-sized businesses continued to increase. During the COVID-19 period, it was also possible to find a phenomenon in which the licensing rate rose, and the closing rate fell depending on the industry. The same was true for start-ups with less than the third year of establishment, but the level of closing rate remained quite high compared to the entire industry, consistent with the results of overseas literature studies. As a result of panel regression analysis on how the social distancing policy introduced to prevent the spread of COVID-19 affected the closing rate of all industries and restaurant industries, it was confirmed that strengthening distancing in sectors for all industries and restaurant industries significantly increased the closing rate.Chapter 4 summarized the corporate support policies implemented during the COVID-19 period for major countries and analyzed the changes in the size distribution of Korean companies by industry. In particular, in order to examine the effect of the COVID-19 support policy, the inequality in the size distribution of companies such as automobile parts manufacturing, textile and clothing industries, and sports and entertainment-related service industries, which were eligible for support, was measured. The greater the industry inequality, the higher the proportion of sales or employment in the industry by a small number of companies. As a result of the analysis, unlike the rapid increase in manufacturing sector inequality due to the impact of COVID-19, the textile and clothing industries increased relatively less, and the automobile parts manufacturing industry decreased, which can infer the support effect. In particular, in the automobile parts manufacturing industry, inequality was somewhat reduced, which shows that the effect of supporting SMEs in the industry would have been greater than those in the textile and clothing industry. The sports and entertainment-related service industry showed a sharp change in the distribution of corporate sizes during the COVID-19 period, indicating that there was government support, but the impact of social distancing was significant.Finally in chapter 5, we presented policy implications based on the above research results. First, it is necessary to foster and support top-tier companies to defend against global economic fluctuations and strengthen international competitiveness. In particular, the institution in charge of competition policies domestically and the institution that helps companies improve their competitiveness are different and the focus of policies is distinctive, so comprehensive attention and perspective of policymakers are needed. Second, it is urgent to respond to new issues related to competition policy in the domestic market. The behavior of emerging big tech and platform companies is different from monopoly companies in the past, so consumer welfare is not impaired, but it burdens nearby and other market participants. Therefore, a view that deviates from the focus on monopoly pricing is also essential for competition policy. Third, measures to support global corporate growth and countermeasures against changes in the industrial landscape should be prepared. Investment and R&D expansion at the corporate level is essential for corporate growth, and measures are needed to boost investment in recently emerging intangible assets. In addition, it is important to revitalize the movement of economic resources to cope with changes in the inter-industry landscape accompanied by the crisis. Fourth, policies to revitalize start-ups and closures are required. The decline in new companies’ market entry and exit rates is a symtom of an aging economy contributing to the overall decrease in productivity. Therefore, enhancing the revitalization of the corporate ecosystem and expanding the size of enterprises are essential to enhance the dynamics of the economy. Fifth, it is necessary to find an appropriate combination of government roles in times of crisis. In particular, it is important to grasp the detailed status of economic stabilization policies in relation to SMEs, and at the same time, clear judgments on the appropriate size of support measures, the period of support, and the timing of collection are urgently needed. -
Global Perspectives on ESG and Implications for Korea
ESG standing for Environmental, Social and Governance has recently emerged as an important subject in the international community. Economic activities considering ESG are being strengthened, and the importance of ESG-related repor..
Jin-Young Moon et al. Date 2022.12.30
economic development, environmental policyDownloadContentSummary<ESG standing for Environmental, Social and Governance has recently emerged as an important subject in the international community. Economic activities considering ESG are being strengthened, and the importance of ESG-related reporting and information disclosure is being emphasized. This study examines the global responses and major issues in ESG and analyzes the ESG scores of firms across major countries and impacts on employment and productivity. Based on these results, it aims to provide implications for government and private sector to address ESG.In Chapter 2, we examined ESG policy trends in selected countries and the key issues regarding implementation of ESG. The European Union plans to implement the new Corporate Sustainability Reporting Directive, revised existing Non-financial Reporting Directive, requiring more companies to report more detailed sustainability information on an annual basis from 2024. Moreover, the EU aims to establishing ESG ecosystem by introducing sustainable finance strategies as well as the EU taxonomy for environmentally sound economic activities. Recently, the United States has been promoting the enhancement of disclosure regulations, especially for climate-related information, mainly driven by the Securities and Exchange Commission. Asian countries such as South Korea, Japan, China, ASEAN, and India also place increased emphasis on voluntary or mandatory ESG-related information disclosure provisions and guidelines.Chapter 2 also covers main issues and challenges to be addressed by both Korean companies and government in dealing with ESG practices and policies. First, in order to improve the consistency and comparability of ESG information, it is necessary to integrate various disclosure standards and set up an internationally accepted common standards. Next, the ability of Small and Medium Enterprises to respond to changing landscape of ESG including data disclosure and due diligence duty is increasing important in attracting investment and participating in global supply chains. In addition, since ESG information is used as important basis for decision-making by companies, investors, financial institutions, consumers, and regulators, companies need to make great efforts to improve the quality of ESG data while government should design policy to facilitate these efforts. Finally, we should consider the various factors that make up the sustainability of corporate activities in a balanced manner so that ESG discussions and systems are not overly focused on a specific area.Chapter 3 reviewed the current status of international supply chain due diligence regulations and major issues, focusing on the recently released EU supply chain due diligence guidelines, and analyzed Korea’s policy support and response conditions. The EU supply chain due diligence guidelines are based on discussions on human rights due diligence by major international organizations such as the UN, OECD, and ILO, and recently EU member states and the United States have also enacted and reorganized their own human rights due diligence laws. In particular, unlike other systems, the EU supply chain due diligence guidelines stipulate due diligence obligations for ESG as a whole. In addition, EU supply chain due diligence guidelines can affect not only directly regulated companies but also domestic and foreign companies in business relationships with them. Therefore, it can be seen as an important issue in terms of the global supply chain.However, the EU supply chain due diligence guidelines are set to be approved by parliament, and there are still various opinions among stakeholders on whether to include climate change and governance in the supply chain due diligence. In addition, there are currently different opinions from the guideline on whether small and medium-sized companies should be obligated to conduct due diligence on the supply chain and what stage of suppliers will be included in the subject of due diligence on the supply chain. In addition to EU guidelines, there are various national regulations such as the United States, Australia, and Canada, so the cost of compliance is likely to increase significantly, and these systems can act as de facto barriers to market entry. In this situation, Korea has also recently begun government-supported projects to respond to due diligence on the supply chain, but the overall interest and response level of the industry is not enough except for some large companies, and 89.4% of SMEs are not ready for ESG.Chapter 4 compares the total ESG score across countries including Korea using Moody’s ESG rating, one of the most famous ESG rating agencies. Unlike other rating agencies that only evalute large companies, Moody’s provides prediction scores for small and medium-sized companies that lack ESG data and thus cover most listed and external audit companies in Korea. According to the empirical analysis, Korean companies’ 2021 scores lag in all areas (ESG/E/S/G) compared to 17 high-income countries and major Asian countries. The scores are low even after controlling companies’ financial characteristics and industry fixed effects, especially in the G area. Specifically, the average of Moody’s ESG scores in 18 countries is 20.7 points, and the average of E, S, and G scores are 12.7, 19.7, and 29.9 points, respectively. In contrast, ESG, E, S, and G scores of Korean firms are 11.5, 6.5, 13.3, and 13.3, respectively. Considering that financial characteristics and industrial distribution of companies vary across countries, the difference in scores may have contributed to the low ESG score regardless of corporate characteristics. However, even when comparing only companies sensitive to ESG evaluation, such as major listed companies and large companies, the ESG performance of Korean companies is insufficient. This result is consistent when using Refinitiv scores, another global ESG rating agency.Chapter 5 examines how ESG evaluation affects firm-level employment and productivity growth. The correlations between the explanatory variables (environmental, social and governance scores) and the dependent variables (employment growth rate, labor productivity, and total factor productivity) were positive in general except for the case of employment growth rate, regardless of whether there is a time lag in the explanatory variables. However, in the panel regression analysis which includes the control variables, there were many cases where there was no effect or a negative effect. A common conclusion from the panel regression analysis can be summarized that (1) governance scores reduce employment growth rate in the non-manufacturing sector, (2) environmental scores negatively affect labor productivity growth in all industries, and (3) environmental and social scores improve total factor productivity growth in non-manufacturing sectors. For the overall score, no common conclusion could be found between the model with the lag and the model without.Given that ESG activities mainly provide information to investors through disclosures in the capital market and encourage companies to pursue sustainability in the long run, it isn’t easy to see a visibly positive effect on corporate productivity or employment growth in the short run, which takes more time than financial performance. On the other hand, the positive effect on productivity in some literature studying cases for the advanced economies may reflect the fact that their ESG activities have been settled earlier than ours. In contrast, Korea has a relatively short history of full-fledged introduction of ESG activities. Therefore, rather than interpreting this result as a negative effect of ESG activities, it would be more desirable to approach and interpret it from the perspective of paying current costs to contribute to the long-term sustainability of society, businesses, and market participants.Chapter 6 presents Korea’s policy countermeasures against the spread of international ESG discussions based on the previous discussions as follows. First, governments and regulators need to focus on overhauling the institutional infrastructure related to ESG application to promote voluntary efforts of companies and investors, rather than forcing ESG information disclosure or ESG investment. First of all, when providing non-financial information reporting guidelines, it is necessary to ensure the autonomy of the private sector by approaching the minimum standards as possible. In addition, the government needs to identify what policy support is needed for SMEs participating in global supply chains to be ESG competitive, and to overhaul more fundamental socioeconomic systems surrounding corporate activities such as industrial accidents and labor-management relations laws.Second, it is necessary to continuously monitor and actively participate in discussions on international supply chain regulations, focusing on the EU supply chain due diligence guidelines, and to expand and reorganize the supply chain due diligence support system for SMEs. In particular, in the case of the EU supply chain due diligence guidelines, it is necessary to monitor discussion trends as there is still a possibility that the contents will change in the process of parliamentary approval, and efforts to convey the opinions of our companies are also needed. In addition to the EU, various countries have recently introduced and operated supply chain-related regulations, so it is necessary to actively participate in international trade cooperation related to supply chain due diligence that may be discussed in the future as well as supporting companies’ responses.Third, governments and companies need to conduct external communication and policy efforts to more actively enhance ESG activities. First of all, the government needs to actively inform major institutional investors and ESG evaluators of domestic ESG enhancement efforts externally, and also needs to identify the difficulties of companies and actively support them in policy. Companies also need to inform investors and the general civil society of their efforts to improve non-financial indicators that reflect the values of various social needs and contribution activities.Fourth, it is necessary to preferentially provide ESG consulting activities to small and medium-sized companies that are closely connected to them in business rather than to large companies. In the case of small and medium-sized manufacturers in Korea, since they are closely connected to large companies through supply chains, whether small and medium-sized companies engage in ESG activities can be an important issue for large companies. Therefore, support for small and medium-sized enterprises needs to be strengthened rather than large enterprises with abundant in-house resources. Above all, as the government has recently emphasized support for infrastructure upgrading to create a private-centered ESG ecosystem, government policies needs to focus on strengthening ESG activities of SMEs and identifying corporate constraints in the mid- to long-term. -
An Analysis of the EvolutaAn Analysis of the Evolution and Factors of the Financial Crisis Using Complex Systems and Machine Learningon and Factors of the Financial Crisis Using Complex Systems and Ma
The shadow of the global financial crisis has been looming recently. Prices of almost all assets have plummeted, including stocks, bonds, digital currencies, and real estate, with some vulnerable emerging countries falling into a ..
Young Sik Jeong et al. Date 2022.12.30
international finance, financial crisisDownloadContentSummary<The shadow of the global financial crisis has been looming recently. Prices of almost all assets have plummeted, including stocks, bonds, digital currencies, and real estate, with some vulnerable emerging countries falling into a foreign exchange crisis. In addition, credit supply to the private sector is also slowing, and corporate defaults are increasing. Will this time be different? Or is another financial crisis on the horizon, only in a different form? This is a matter of great concern both on the international and national arenas. Therefore, this study seeks to discover valuable clues from previous cases and the use of new methodologies. We look at network patterns prior to and following the previous financial crises, factors that predict financial crises, and how one financial crisis leads to another financial crisis; and based on this, we diagnose the current situation and identify potential risk factors looking forward.This study largely consists of five parts, excluding Chapter 1 (Introduction) and Chapter 2 (Existing Research on Financial Crisis: Focusing on Causes and Development Process). In Chapter 3, we examine the relationship between the characteristics of financial crises and the network structure of financial market participants using micro data. During a financial crisis, a high degree of synchronization among heterogeneous economic agents tends to impact the characteristics of the network, resulting in a statistically significant change in the network structure. The connectivity of corporate and bank networks has been found to be very closely related to indicators of financial market risk and volatility. These characteristics were consistently found in domestic and international stock markets, Korea’s social media, and U.S. syndicated loan data. Also, recent network analysis data on the Korean stock market and social media show a strong pattern of synchronization among heterogeneous agents, similar to previous financial crisis periods. In particular, the distribution of correlations among individual companies in the Korean stock market in 2022 is similar to that during the 1992 Nordic financial crisis and the 2011 European fiscal crisis, and is approaching the distribution shown during the 2008 global financial crisis. This indicates the recent increase in risks within the Korean financial market.In Chapter 4, this study analyzes cross-border capital flows through network methodologies from the macro-perspective. The analysis focuses on the 2008 global financial crisis and 2020 pandemic crisis by deploying IMF CPIS and BIS LBS data. Based on the IMF CPIS dataset, we find that the slump in international capital flows was stronger during the 2008 crisis compared to the 2020 pandemic, and its contraction was more persistent during the 2008 crisis. International capital flows sunk abruptly from the start of the 2020 pandemic crisis, but bounced back quickly after the second half of 2020. One rationale for this observation could be the different characteristics of the crisis triggers involved: i.e, the intrinsic defects of the financial system exposed through the U.S. subprime mortgages served as the trigger in 2008, whereas the trigger for the 2020 pandemic was an exogenous outbreak of infectious diseases. Examining banking flows from BIS LBS, we find Japan and Germany were the main fund suppliers during 2008 and 2020 crises while the demand for banking funds during these crises mainly originated from the U.S. and UK. This pattern tends to be in the opposite during normal phases. We can gather from the BIS LBS data that the network connectivity was more damaged after the onset of the 2008 crisis, but the contraction of banking flows was more severe during the 2020 crisis. HHI (Herfindahl-Hirschman Index) for banking flows suggests that the financial network became concentrated on a few lending and borrowing countries and this escalated risk during the 2008 crisis, but the same pattern was not found in 2020. We must leave diagnosis on cross-border capital flows in 2022 for future study due to the lack of recent data in CPIS and LBS.In Chapter 5, we use machine learning techniques to examine which factors are important in predicting financial crises. For the entire period (1870-2017), our random forest model shows that the top six most important predictors are the slope of the yield curve, CPI, consumption, debt service ratio, equity return and public debt. According to our analysis, the recent developments of these six predictors indicate an increase in the possibility of a financial crisis. Recently, major countries are showing inverted yield curves and the CPI recorded its largest increase in 40 years since the 1980s. In addition, the slowdown in consumption, increase in the debt service ratio, plunge in stock prices, and high government debt are also factors that indicate the possibility of a financial crisis. In the case of the global financial crisis (2007- 2008), the main factors are the yield curve slope, debt service ratio, consumption, CPI, public debt and equity return, in order of contribution to prediction. Compared to the entire period, the rankings of the debt service ratio and public debt have risen. In predicting the Nordic banking crisis (1988-1993), the yield curve slope, CPI, debt service ratio, consumption, equity return and public debt are important and the contribution of the debt service ratio increased. Therefore, the recent global inflation suggests that the future financial crisis may be closer to the Nordic crisis than the global financial crisis.In Chapter 6, as a result of examining various past financial crisis case groups through system dynamics (causal loop diagram), five characteristics were found in common, although the appearance of financial crises was different for each case group. The first was a feedback loop that strengthens credit expansion. A monetary easing policy and various factors combine to expand credit, and as this is also combined with achievements such as high growth, rising asset prices, high profits at financial institutions, and stable currency values, a feedback loop structure emerges in which credit continues to expand. Next, a feedback loop that strengthens credit expansion led to the accumulation of financial crisis risk. Specifically, at the national level, high inflation, fiscal account deficit, current account deficit, overvaluation of currency, and expansion of external debt occurred. At the financial institution level, maturity and currency mismatches, increased investment in high-risk assets, and increased loans to low-credit groups appeared. Thirdly, there was the shock that precipitated the financial crisis. Although tight monetary policy is the main factor, various policy and institutional changes, major political and economic events, and changes in investment behavior also act as shock factors. Fourth, there was a risk spreading factor. The degree of spread for each financial crisis depended on the level of risk spread factors (connectivity of networks and synchronization of actions). In addition, the degree of spread of the financial crisis differed depending on whether or not a financial crisis had occurred in a global money-supplying country. Lastly, individual financial crises do not end with themselves, but have the common feature of becoming the seeds for a new crisis. Previous cases show how a new crisis was conceived in the process of responding to a financial crisis and its effects, such as changes in monetary policy, asset prices, fund management behavior, or in the economic structure. When evaluating the recent situation based on these five common characteristics, it was found that the risk of a financial crisis is rising. This is because shocks such as monetary tightening in major countries and escalating geopolitical risks, which can trigger a financial crisis, are adding to the accumulation of risks such as overheating of various asset markets, pursuit of leverage- based high returns, and deterioration of current account balance and external debt of resource-importing countries. Due to structural changes that have occurred since 2008, such as deglobalization, low growth in the Chinese economy, high inflation, a noticeable increase in the size of non-banking and capital markets, and digital asset bubbles, it is likely that any future financial crisis will develop differently from those of the past. In particular, with regard to the financial system, the risk of a financial crisis resulting from market risk rather than credit risk has increased. Furthermore, in terms of cross-country capital flows, the risk of a financial crisis through portfolio investment is now greater than in the past.Chapter 7 presents the conclusions and policy implications of this study. Two main conclusions were drawn from the study. First, financial crisis is a systemic problem rather than an individual risk factor. Second, when diagnosing the recent situation, the results indicate a risk of a financial crisis spreading beyond some vulnerable emerging countries. These findings yield the following three policy implications. First of all, since the nature of a financial crisis lies in system collapse, policy authorities must strengthen their systemic approach. This is because it is difficult to effectively manage all processes of crisis management, such as risk diagnosis, prevention, shock mitigation, and follow-up management, without a systemic approach. Next, as the risk of a financial crisis has been increasing recently, it is necessary to identify vulnerable factors at the system level and seek ways to mitigate them. The asset bubble in areas such as stocks, bonds, real estate, or digital currencies, together with high-leverage derivative financial products traded under the sustained period of ultra-low interest rates, high volatility of natural resource prices, and portfolio investment channels are being identified as the representative factors of vulnerability. Lastly, combining complex system (network, system dynamics) and machine learning methodology with traditional statistical techniques presents great potential for improving the financial stability in Korea. -
ASEAN’s Medium- to Long-term Trade Strategies and Korea-ASEAN Cooperation Plans
In recent years, the U.S.-China hegemony competition has intensified, dividing the world into two blocs. ASEAN has long cultivated its position on the international stage by maintaining a certain distance between the United States..
Sungil Kwak et al. Date 2022.12.30
economic security, economic cooperationDownloadContentSummary<In recent years, the U.S.-China hegemony competition has intensified, dividing the world into two blocs. ASEAN has long cultivated its position on the international stage by maintaining a certain distance between the United States and China. In that sense, ASEAN is the best partner for Korea to effectively respond to the divided world. Therefore, this study seeks the directions of cooperation with ASEAN in supply chain, digital trade, climate change response, and health and development cooperation in line with changes in the international order.Chapter 2 analyzed the supply chain restructuring in the ASEAN region. Recently, the global value chain (GVC) has been rapidly changing due to the intensifying U.S.-China trade war and expansion of technology competition led by the United States. In addition, economic security issues have been raised as one of the driving factors to the recent changes in GVC. Such changes are expected to lead the following developments in ASEAN. First, expansion of the regional value chain (RVC) in East Asia will be led by ASEAN and China, and the structure of ASEAN’s supply chain will undergo modification in accordance with the GSC strategies of the United States. Also, FDI toward ASEAN will increase as more multinational companies depart from China and Chinese companies expand investment in the region. ASEAN will continue efforts to digitalize its customs clearance process while also promoting digital trade. Lastly, each ASEAN member state’s supply chain will be transformed in line with the strategic industries and core items such as high-tech products (semiconductors and batteries), minerals, medical and health products, and crops.Chapter 3 analyzed the digital economy and digital trade in the ASEAN region. Due to the spread of COVID-19 and the development of information and communication technology, the digital economy has rapidly expanded around the world. Even before the outbreak of COVID-19, ASEAN had promoted digital transformation and integration, and the outbreak of COVID-19 has further increased its importance in terms of economic recovery and creation of growth engines. Digital transformation and digital trade are areas where Korea and ASEAN are in high demand for cooperation. ASEAN’s digital transformation conditions and digital competitiveness vary greatly by country. Singapore has world-class digital competitiveness and infrastructure, while Indonesia and the Philippines, which have relatively low income levels, and Myanmar, Cambodia, and Laos, which are relatively new members of ASEAN, have low digital competitiveness and poor related infrastructure. As digital trade expands, concerns about digital trade barriers are also growing. In the case of major ASEAN countries, digital trade barriers are high in most countries except Singapore and the Philippines.ASEAN is actively promoting digital transformation policies and strengthening digital trade cooperation with countries within and outside the region. ASEAN has promoted digital transformation policies since the 2000s. With the COVID-19 outbreak accelerating digital transformation, ASEAN has unveiled policies such as the ASEAN Comprehensive Recovery Framework (ACRF), ASEAN Digital Master Plan 2025 (ADM 2025), and Bandar Seri Begawan Roadmap (BSBR). ASEAN’s digital policy focuses on facilitating digital trade, strengthening digital capabilities, establishing a digital payment system, and expanding digital infrastructure. ASEAN aims to initiate negotiations on the ASEAN Digital Economy Framework Agreement (DEFA) by 2025. ASEAN is promoting cooperation on digital trade rules through FTAs with countries within and outside the region, such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).Chapter 4 analyzes the response to climate change in the ASEAN region. As the climate change and carbon neutrality issues are emerging as global agendas, ASEAN has established and implemented a series of adaptation and mitigation policies to achieve its carbon neutrality target, but still remains in great need for cooperation. Among ASEAN member countries, Indonesia ranked in the top 10 emission countries in the world, and accounted for the largest share of overall emissions in the region. The international community has been implementing a series of climate-change cooperation schemes, such as the Kyoto Protocol in 1977 or the Paris Agreement in 2015. ASEAN, as a regional community, also has been implementing its own internal and external cooperation schemes, while individual ASEAN Member States (AMS) have built their own national-level initiatives to achieve NDC targets. According to an analysis of Creditor Reporting System (CRS) data provided by the OECD, Indonesia is the biggest ODA recipient among AMS in climate change-related sectors. By sectors, water-resource/sanitation and environment protection took the major share of entire ODA. The Korea-ASEAN Dialogue on Environment and Climate Change (2021) has been the major cooperation channel for Korea-ASEAN climate change cooperation, producing a series of initiatives in the areas of air pollution, carbon dialogue, carbon neutrality and the establishment of a green transition center, etc. Vietnam and Indonesia are the biggest recipients of ODA from Korea to ASEAN, with water resource/sanitation and environment protection accounting for the major share of this ODA. When considering the emission levels of AMS, multilateral cooperation schemes, and Korea-ASEAN cooperation, the biggest emitter (Indonesia) and ODA recipient (Vietnam) are projected to have the highest demand for bilateral climate change cooperation. Previous ODA projects show a concentration in the areas of water resource/sanitation and environment protection, which have taken the major share of Korea’s ODA to ASEAN. The demand for cooperation in renewable energy sources is expected to increase in line with efforts to mitigate the high level of emissions produced in the power and transport sectors.Chapter 5 shows that Korea’s cooperation with ASEAN in the health sector focuses on vaccinations, nutrition improvements, and infrastructure construction. Recently, the need for collaboration in universal health coverage has been raised. Korea’s ODA for digital transformation possesses a comparative advantage against other major ODA donors, which can be leveraged in ODA projects such as health promotion, education, and rural development. The importance of green ODA is increasing due to countries’ implementing greenhouse gas reduction policies. The Korean government is also making efforts in policy-making to link green ODA with overseas greenhouse gas reduction projects.Based on the above, the direction of ASEAN cooperation by sector is proposed as follows. Above all, for supply chain cooperation with the ASEAN region, Korea should predict changes in the supply chain and set an effective direction of response. First, Korea should utilize ASEAN, which has become a global manufacturing hub, as Korea’s main production site for key sectors and strategic items to diversify its supply chain structure. Second, Korea should actively support the establishment of ASEAN’s supply chain and pursue diversification of its supply chain with ASEAN key partner countries. Third, Korea should assist in digitizing ASEAN’s supply chain as well as ASEAN’s DX (Digital Transformation) by leveraging its advanced digital technology. Fourth, Korea should take advantage of ASEAN’s efforts to transform its supply chain (e.g. strengthening manufacturing capabilities, upgrading industrial structures, training human resources, etc.) as a favorable opportunity for Korea’s economic cooperation with ASEAN.Digital transformation and digital trade are fields of great interest to both Korea and ASEAN, and cooperation has been actively pursued. The digital sector is also a key area of cooperation in Korea’s new cooperation policy toward ASEAN, the Korea-ASEAN Solidarity Initiative (KASI), which was unveiled during the 23rd ASEAN-Korea Summit in November 2022. Based on our analysis, this paper suggests the following four areas for Korea-ASEAN digital cooperation. First, Korea-ASEAN cooperation should contribute to narrowing the digital infrastructure gap by country. This is because the digital infrastructure gap eventually creates a national income gap in the ASEAN region as the digital economy continues to grow. Second, cooperation between the two regions should be strengthened through Korea’s experience in designing and implementing e-government systems. This is an area where Korea has accumulated more experience compared to advanced Western countries. Third, cooperation is necessary to strengthen digital capabilities and foster talent in the ASEAN region. Even when a sufficient infrastructure has been established, it is useless if there is no one to manage it. Finally, it is necessary to support the strengthening of capabilities to establish digital trade norms in the ASEAN region.ASEAN is also showing high interest in responding to climate change. For future climate change cooperation between Korea-ASEAN, both sides should establish cooperation agendas based on the demand within ASEAN and current national levels, as follows. First, the present bilateral cooperation channels established only with Vietnam and Indonesia should be extended to other AMS. Second, cooperative efforts will be necessary to drive the energy transition in power generation (from coal to RNE) to respond to the high demand of AMS. Third, there must be a linkage system between multilateral and bilateral cooperation channels to exchange and utilize each agenda. Fourth, considering the industrial structure of ASEAN and Korea, which are heavily reliant on the manufacturing sector, Korea should include carbon capture and storage (CCS) projects within its scope of cooperation with AMS in the climate change agenda.Finally, this study presents the following four directions for health and development cooperation between Korea and the ASEAN region. First, Korea should share its past development experiences to support ASEAN countries’ policy-making. Korea’s experience in implementing a national health insurance system can help improve universal health coverage systems in ASEAN countries. Second, the Korean government should carefully assess recipient countries’ potential for digital transformation ODA, as this is linked with many other subfields. Third, developing win-win strategies between Korea and recipient countries through ODA projects is necessary. Specifically, green ODA can help Korean firms gain contracts for infrastructure development in ASEAN countries. Fourth, large-scale ODA packages allow Korea and other recipient countries to develop and implement projects that both partners can recognize as important. -
Effects and Implications of China’s Carbon Pricing Policy on Changes in Korea-China Economic Relations
China’s “carbon neutral clock” has been speeding up since pivoting from its original skepticism regarding developing countries’ obligations to reduce emissions, internationally declaring in 2020 its vision of bringing carbon e..
Jihyun Jung et al. Date 2022.12.30
economic relations, environmental policy ChinaDownloadContent
Summary<China’s “carbon neutral clock” has been speeding up since pivoting from its original skepticism regarding developing countries’ obligations to reduce emissions, internationally declaring in 2020 its vision of bringing carbon emissions to a peak in 2030 and achieving carbon neutrality by 2060. As a developing economy that emits the largest amount of carbon in the world, China’s declaration of carbon neutrality ahead of Korea, the United States, and Japan was praised as a “historic event” adding momentum to the vision of carbon neutrality proposed by the EU, as well as certain doubts over the plausibility of this declaration. However, South Korea, which is highly dependent on China’s economy, experienced an unintended supply chain shock during the so-called “urea water crisis,” and has come to realize the potential ripple effects caused by China’s accelerated “carbon neutral clock.” This study began with the question of and concern over how China’s carbon neutrality policy will affect not only China but also Korea. Leaving for the future a quantitative impact analysis on the entire carbon neutrality policy accompanied by economic and social transformation, this study chose to analyze the impact of China’s carbon price policy, as the first among developing countries to start a national emissions trading system (ETS).In Chapter 2, following a review of China’s carbon reduction strategy, the development process and characteristics of carbon price policy were analyzed. Aiming to meet its mid- to long-term growth target for 2035 (first stage goal of socialist modernization, doubling GDP from 2020), China has designated the target period for carbon emission peaking and achieving carbon neutrality. It plans to reduce carbon emission intensity (emission to GDP) rather than total carbon emission by 2030, the target year for carbon emission peaking, and its strategy is to reduce total carbon emission quickly by 2060 after reaching the mid- to long-term growth target in 2035. Accordingly, in the short term, it plans to control production in high-emission (i.e. high-pollution) industries to quickly reduce emissions. It is also expected to provide support for the development of energy-saving and low-carbon technologies and the increase of renewable energy facilities in the medium term, and to strongly promote carbon price policies in the long term.China’s current carbon price policy is the ETS, in line with which pilot projects have been implemented in eight regions since 2013 and a national ETS since 2021, with plans to integrate these in the future. The regional ETS, which has accumulated about 10 years of experience, applies paid and free quotas to various industries (differing by region), while the national ETS applies 100% free quotas only for the power generation sector. The Chinese government plans to expand the nationwide ETS to eight major high-emission industries (electric power, petrochemical, chemical industry, building materials, steel, nonferrous metals, paper, and aviation) by 2025. It is also expected to gradually promote the reduction of free quotas and increase the proportion of paid allocation by lowering the benchmark coefficient. The nationwide carbon market remains in the early stages of implementation, but is receiving positive response for establishing a transaction system, improving measurement, reporting, and verification (MRV) processes related to carbon data quality, and high carbon transaction prices compared to pilot projects (40-60 yuan/tCO2). However, problems such as lack of mid- to long-term plans, concentration of carbon transactions leading up to the closing date (i.e. market activity problems), and data manipulation by some companies have been exposed as limitations.Chapter 3 examines the issues of the global carbon price system, and identifies discussions on China’s introduction of carbon taxes and responses to the EU’s Carbon Border Adjustment Mechanism (CBAM). In order to reduce greenhouse gas emissions, 68 regions around the world have introduced ETS (32 regions) and carbon taxes (36 regions) as of April 2022, and some regions have implemented carbon taxes as auxiliary measures in fields not included in ETS. Recent issues regarding the cross-border carbon price system include the introduction of CBAM by the EU, and the formation of international climate clubs. The EU’s introduction of CBAM is triggering discussions on the introduction of carbon pricing in several countries, and international climate clubs centered on advanced countries are negotiating tariff cuts on low-carbon items. Meanwhile, China supports the Paris Agreement system, which imposes differentiated responsibilities on developing countries, and is conducting research on carbon pricing (e.g. the establishment of a joint carbon credit market) and related standards through the Belt and Road Initiative.China’s introduction of a carbon tax is likely to come after 2035, when strong carbon reduction targets are proposed, and the ETS system in itself is considered to be limited in achieving the reduction targets. In addition, fields that do not overlap with ETS are expected to be charged at a level similar to emission prices. However, some research institutes in China and researchers have raised the possibility of introducing a limited carbon tax for some industries, a scenario that cannot be completely excluded when preparing response measures to the EU CBAM.China opposes the EU’s introduction of CBAM, characterizing it as a measure to expand the issue of climate change to trade barriers. However, it seems that it is preparing for active negotiations with the EU while analyzing CBAM regulations and their effects. First of all, the Chinese government has supplemented and developed its carbon trading system in response to the EU’s CBAM (internal response), based on which it intends to promote coordination and negotiations with the EU regarding CBAM (external response). In particular, in order to develop its domestic carbon transaction system, the government is ① expanding the scope of industries subject to the national ETS (including the scope of CBAM), ② strengthening the foundation for collecting carbon emission-related data, and strengthening punishment for violators, and is ③ promoting the swift establishment of unified and standardized carbon emission statistics and accounting systems. Meanwhile, on the external side, the Chinese government is trying to propose alternative approaches to reduce its differences in position with the EU. Noteworthy among these are negotiations on whether the Chinese government should be viewed as a taxable entity for carbon emissions produced by Chinese companies in CBAM-applied items.In Chapter 4, the effect of China’s carbon price policy on changes in China’s industrial production and cost was analyzed using a computable general equilibrium (CGE) model and interindustry analysis. In particular, in this study, the carbon price by industry required for this impact analysis was not regarded as an exogenous variable, but the carbon emission cost burden rate by industry was estimated and applied to each model by reflecting China’s ETS policy and reality. The results of this analysis estimate the burden rate of carbon emission costs by industry according to China’s carbon price policy at 0.03 to 3.28% (average between 2026 and 2030), and the resulting increase rate of producer prices (production costs) by industry was 0.22 to 2.0%. It is noteworthy that although the carbon emission cost burden ratio was applied only to industries subject to the Chinese carbon price policy, overall production costs increased for the Chinese industry. In addition, some industries showed a higher rate of increase in production costs than those with a high rate of emission cost burden, even though they had very little (e.g. metallic products processing) or no (e.g. electrical equipment, machinery and equipment, construction) emission cost burden. As described above, it is relatively unlikely that China’s ETS will be strongly promoted during the analysis period, so the growth rate of production costs by industry was relatively low. However, the relationship between industries where costs rise, and the extent of this increase, have great implications. It should also be noted that the cost of production in the entire Chinese industry may further increase due to the cost spent in promoting non-market-based carbon reduction policies, which are the key policies of the analysis period. According to the results of our CGE model analysis, most of the industries subject to the Chinese carbon price policy showed a slight decrease in industrial production in the long run, while production increased in industries to which the policy was not applied. Through this, the study confirms the possibility that China’s carbon price policy will change China’s industrial structure in a more eco-friendly direction. The analysis result of this CGE model can be understood as a long-term result that combines various factors such as China’s economic and industrial structure, input factors, new technologies, and changes in trade and investment.In Chapter 5, the impact of China’s carbon price policy on changes in economic relations between Korea and China was analyzed in terms of Korea’s export competitiveness, Korea’s imports from China, and investment in China. Korea’s export competitiveness was analyzed by the CGE model by dividing it into conditions where only China’s carbon price policy is implemented (Scenario 1), only the EU’s CBAM is implemented (Scenario 2), and China’s carbon price policy and EU CBAM are applied at the same time (Scenario 3). The results of the analysis indicate that Korea’s export competitiveness to China’s eco-friendly (non-polluting) market gradually weakens as China’s carbon price policy reduces production in high-pollution industries and increases competitiveness in non-polluting industries in China. However, in relevant industries, Korea’s exports to the world increase in a manner similar to China, and there appears to exist a complementary relationship between Korea and China in the global market related to non-polluting industries. When only CBAM was implemented (Scenario 2), Korea’s exports to the EU increased slightly overall, while China’s exports to the EU showed different levels of increase or decline by industry. When China’s carbon price policy and EU’s CBAM were applied simultaneously (Scenario 3), Korea’s exports to the world increased in most industries, while China’s exports to the world increased in non-polluting industries.The impact of China’s carbon price policy on Korea’s imports and investments in China was calculated based on the premise that the increase in China’s production costs by industry is 100% transferred to consumer prices and export prices, as was demonstrated in Chapter 4. In this case, due to China’s carbon price policy, industries with high growth rates of import prices (= production cost growth rate) to China and high dependence on imports to China included metal processing products, machinery and equipment, non-metallic minerals, automobiles, and primary metals. In particular, in the case of the machinery and equipment, automobile industries, the growth rate of imports to China over the past five years was also high, making the impact of China’s carbon price policy more visible. Chemical products (16.1%), Korea’s second-largest industry in imports from China, and wood and paper, textiles and leather did not show a high rate of increase in import prices. However, all of these industries are highly dependent on imports from China. In addition, especially in the chemical industry, imports from China have also sharply increased, indicating some influence is unavoidable. Meanwhile, computers and electronics (33.8%), Korea’s no. 1 industry in imports from China, are unlikely to have a significant impact because the growth rate of import prices to China is relatively low, as is dependence on imports from China. However, when analyzing detailed items (six-unit HS codes), Korea’s total number of imported items from China in 2021 was 5,470. Among them, 78 items were 100% dependent on imports, 390 items 90% or more, and 975 items 70% or more, demonstrating the importance of managing detailed items that are highly dependent on imports for each industry.When it comes to Korea’s investment in China, the industries that will be most affected by the rise in production costs due to China’s carbon price policy are electrical equipment and automobiles. In addition, the computer and electronics, chemical, non-metallic minerals, and mining industries are expected to be relatively greatly impacted. In particular, electrical equipment is Korea’s second-largest industry of investment in China, and is recently showing rapid growth. In addition, although it is an industry to which the carbon price policy does not apply, the growth rate of production costs is increasing on par with the power generation industry, which has the largest rate of carbon emission cost burden. Because of this, the impact is expected to be the greatest. Along with computers and electronics, which account for the highest proportion of Korea’s investment in China (39.1%), the automobile industry has a relatively low direct impact on rising production costs due to carbon price policies, but is expected to be greatly affected indirectly. For this reason, caution is needed in that if the regulatory intensity for other industries grows higher, the increase in production costs may be further expanded through indirect effects. However, in the computer and electronics industries, which account for the highest proportion of Korea’s investment, import, and export to China, there is a possibility that China’s influence may be offset in that dependence on exports and imports to China may also be lowered if Korea’s investment destinations change due to the reorganization of the global supply chain, expanding role of new production bases such as ASEAN, and reshoring policies by major countries in the future.Chapter 6 summarizes the above analyses and presents the conclusions and implications of this study. First of all, these conclusions were presented in the areas of: ① China’s carbon price policy causing industrial production and cost changes, ② changes in Korea’s export competitiveness due to China’s carbon price policy, ③ China’s carbon price policy and Korea’s import and investment in China, ④ China’s carbon reduction strategy and supply chain risk from China, ⑤ the conditions and timing of China’s introduction of carbon tax, and ⑥ China’s response to CBAM. Finally, implications for the Korean government and companies (industry) were presented in terms of: ① responding to import supply chain risks related to China’s carbon reduction policy, ② seeking cooperation with China, and ③ responding to the EU CBAM. -
The Linkage between International Trade and Labour Standards: Current Status and Implications
Through the evolution of international trade agreements, the conceptual boundaries of ‘trade’ have expanded beyond the simple movement of goods across national borders to a matter of common economic governance among countries. I..
Cheon-Kee Lee Date 2022.12.30
labor market, barrier to tradeDownloadContentSummary<Through the evolution of international trade agreements, the conceptual boundaries of ‘trade’ have expanded beyond the simple movement of goods across national borders to a matter of common economic governance among countries. In particular labor standards have long been a controversial issue in international trade. The linkage between trade and labor standards is expected to emerge as an important trade issue in the future. Internationally recognized labor standards such as those adopted by the International Labor Organization (ILO) have been incorporated into FTAs, and the level of protection of labour rights has been enhanced significantly with respect to both substantive and procedural FTA provisions. Further, there have been a couple of cases where a Party’s failure of FTA labour obligations was referred to judicial review under FTA dispute settlement procedures.This study examines the trade-labour linkage in three main aspects. Firstly, the most traditional approach of linking trade and labour standard has been to improve labour standards in trading partners through bilateral and plurilateral trade agreements including FTAs. This trend is in line with the recent increase in litigation between countries under a FTA dispute settlement procedure. Since 2018, there have been a total of 18 cases where Parties invoked FTA dispute settlement provisions, four of which were labour- or environment-related disputes. It is also worth noting that two out of these four cases were complaints filed against Korea.The main components of FTA labour standards include (ⅰ) incorporation of ILO international labour standards (ⅱ) non-derogation (ⅲ) effective implementation of labour obligations (ⅳ) labour cooperation, and (ⅴ) corporate social responsibility (CSR). More recent FTAs also cover issues such as gender equality, protection of migrant workers' labour rights, and import prohibition on products made by forced labour. With respect to enforceability and dispute settlement, one should pay particular attention to the Facility-Specific Rapid-Response Labor Mechanism or “RRM”, which was introduced by the United States for the first time in USMCA. Under the RRM, the Parties can address settle labour-related matters more quickly and effectively than the traditional ‘state-to-state’ dispute settlement system, by directly targeting ‘facilities’ responsible for alleged infringements of freedom of association or the right to collective bargaining.Further, the Panel of Experts ruling made on January 20, 2021 under the Trade and Sustainable Development (“TSD”) Chapter of the Korea-EU FTA would likely have an important implication in future negotiations, interpretation and application of FTA labour standards. In that case the Panel held that government measures that address labour rights, irrespective of whether such measures were actually targeted at industries, companies or workers engaged in international trade, can essentially be ‘trade-related’ measures under the Korea-EU FTA. According to the Panel, trade and fundamental labour rights are intrinsically linked.Secondly, more recently a series of attempts have been made to introduce a new trade-labour linkage model that can be distinguished from the previous FTA labour standards, as witnessed in the ongoing IPEF negotiations. Labour issues are being dealt with as a core agenda in Pillar 1 led by the United States. Theoretically, the IPEF Pillar I labour standards could be (ⅰ) USMCA or USMCA plus level, (ⅱ) U.S. FTA level prior to USMCA, or (ⅲ) based on ILO international labour standards. For instance, in the negotiation the United States might try to link the issue of forced labour to supply chain issues to match the USMCA level. It is also important to note that without the obligation to prohibit imports made by forced labour, a certain level of leverage can be made against forced labour-issues within IPEF Parties’ domestic law and policies, via the incorporation clause of the ILO Declaration on Fundamental Principles and Rights at Work. The same declaration refers to the principle of 'elimination of forced labour' as a fundamental labour right. Thus for IPEF Parties it would likely be an important task to make eliminate use of fource labour economy-wide. It would be wise to start from sectors and industries where concerns have been raised related to the possible use of forced labour. The Trafficking in Persons Report of July 2022 and the Report on Human Trafficking in the Seafood Supply Chain of 2020 by the U.S. Department of State can be a starting point.Thirdly, in addition to the trade-labour linkages at the international level, the linkage at domestic level appears to be in full swing. In particular, import restrictions on products made by forced labour during product production process are becoming visible, especially in the U.S. and EU. The Uyghur Forced Labor Prevention Act or “UFLPA”, which went into effect on June 21, 2022 in the U.S., is the most obvious example. The UFLPA provides for (ⅰ) import prohibition of goods made by forced labour and (ⅱ) sanctions against individuals and businesses related to the use of forced labour in Xinjiang Uyghur Autonomous Region (XUAR), China. Under the rebuttable presumption under the UFLPA, it has been reported that a considerable amount of imports from XUAR have currently been withheld because importers could not demonstrate that the product at hand was not produced in XUAR nor otherwise using forced labour. According to the UFLPA Enforcement Strategy published on June 17, 2022, polysilicon, cotton, tomatoes, and apparel products were designated as 'high-priority sectors for enforcement' and are receiving the most strict import restrictions. Further, since its implementation, a number of enforcement cases have been confirmed on other sectors including electronics, agricultural products (other than tomatoes and tomatoe products), pharmaceuticals, and base metals. It is expected that CBP will continue to expand UFLPA enforcement and eventually require supply chain tracking for a wider range of products.In a similar vein, the European Commission announced on September 14, 2022 the Proposal for a Regulation on prohibiting products made with forced labour on the Union market. The proposal prohibits the placing on the EU market of products made with forced labour as well as their export from the EU. Unlike the UFLPA, the EU proposal does not explicitly refers to XUAR or China, but are designed to be universally applicable to all products regardless of country of origin (even including EU member states within its internal market). It is expected that the U.S, and EU will develop a consistent trend to make stricter labour standard compliance mandatory for the entire supply chain of products.Based on the analysis above, this study advises that the Korean government identify trade and labour-related concerns raised or likely to be raised by other trading partners and rationales behind it, and to assess possibility of such concerns to become a formal trade disputes filed against Korea through FTA dispute settlement mechanisms. It is important to take such assessments into consideration when preparing future negotiation strategies for FTA/IPEF labour standards. Also, clarifying the scope, legal nature, and meaning of each FTA labour standard would be a meaningful task to secure legal stability and predictability, and to prevent trade disputes related to FTA labour obligations.It is also necessary to prepare for the possibility that FTA labour standards may act as regulatory barriers to Korean companies that are established in the third countries and produce and export goods to the U.S. For instance, the IPEF can have significant implications because many ASEAN countries such as Vietnam, Thailand, the Philippines, Indonesia, and Malaysia are participating in the Pillar 1 negotiation.For the IPEF negotiations, since market access is not a subject of negotiation in IPEF, it is necessary to think about what can be presented as a carrot to the stick of strict labour standards. If the IPEF includes an enforcement mechanism, such an enforcement mechanism should largely be based on either incentives or penalties for compliance and breaches of labour standards.Lastly, it is necessary to be take caution in introducing laws and systems for regulatory measures that link labour standards and supply chains, such as measures to prohibit imports made by forced labour. To prepare for labour standards and supply chain-linked regulatory measures and minimize the adverse impacts, this study advises that the Korean government consider establishment of a single response system that can jointly respond at the national level to such regulations. -
Liberalization of the Global Market for Environmental Goods and Services: International Discussions, Trends, and Economic Effects
The international community is striving to establish norms concerning the environmental market. It endeavors to secure a free and fair trade order, and contribute to achieving carbon neutrality and sustainability. In this study, w..
Jukwan Lee et al. Date 2022.12.30
free trade, environmental policyDownloadContentSummary<The international community is striving to establish norms concerning the environmental market. It endeavors to secure a free and fair trade order, and contribute to achieving carbon neutrality and sustainability. In this study, we first examine related discussions, then review the current status and market openness of environmental goods and services. Analyzing the effect of market liberalization on the Korean economy, we conclude with policy implications which could contribute to the Korean government’s policy making in the subject.Chapter 2 examines each country and international organizations’ definition on the environmental industry, goods and services, then it introduces the formation of related trade norms. Environmental goods are generally defined as products contributing to environmental protection and sustainability, and based on the degree of eco-friendliness throughout the product’s life-cycle. However, what constitutes environmental goods is a controversial issue among countries which depends on political and economic interests. As for environmental services, the UN, the OECD, and the EU define them as both including environmental protection and resource management, whereas the WTO focuses on pollution management.Multilateral organizations such as the WTO, the OECD, the APEC and the UNCTAD have made great efforts to establish the scope of environmental good and services and related trade norms, but these ultimately came to a standstill. Current discussions at the Trade and Environmental Sustainability Structured Discussions (TESSD) involving the liberalization of environmental goods and services, as well as bilateral and regional talks such as the Indo-Pacific Economic Framework (IPEF), are focusing on efforts to form related norms, toward which promising results are being seen.Chapter 3 examines the status of market openness and trade up to the latest (year 2021) using a broad list that encompasses the discussion of environmental goods and services in the international community. First, environmental goods are already subject to relatively low tariff rates. Second, countries which took part in the environmental goods negotiation had lower tariff rates compared to those which were not. Third, Korea’s effectively applied tariff rates on environmental goods are lower than 5%. While most environmental products Korea imports from the EU, USA and India are duty free, 40% of Chinese goods are subject to tariffs. Fourth, Korea’s top trade partner in environmental goods is China. For environmental services, the concession analysis suggested that Korea’s WTO concession level is low and concessions in subsequently signed FTAs only showed partial improvements.Chapter 4 considers the liberalization of the environmental industry. Based on the empirical analysis regarding the effect of environmental norms developed to date, we suggest that environmental measures have a negative effect on trade (in this case, imports). Followed by this, our simulations predicted that opening the environmental goods and services’ market would yield positive results. However, this effect was greatly affected by the composition of the participating countries, and particularly the participation of China, which accounts for a large proportion of the global environmental goods and services market.Accordingly, we expect Korea to benefit from the formation of norms and the lowering of trade costs following the liberalization of environmental goods and services’ market. Based on such reasoning, chapter 5 gives some guidance about future multilateral, regional, bilateral discussions, and domestic actions related to the liberalization of environmental goods and services. -
A Comparative Study on ODA Policy Process: Public Awareness as a Policy Motive
For a decade since joining the OECD DAC in 2010, Korea’s ODA saw immense improvement in terms of its scale, governance structure, and strategy. This was efficiently achievable through a process of fast-following the examples prov..
Jeonghwan Yun et al. Date 2022.12.30
ODA, foreign aidDownloadContentSummary<For a decade since joining the OECD DAC in 2010, Korea’s ODA saw immense improvement in terms of its scale, governance structure, and strategy. This was efficiently achievable through a process of fast-following the examples provided by leading global donors. However, such condensed development of institutions was insufficient to ensure the holistic improvement of all related governance systems. Especially, the policies and strategies for public relations were deemed of secondary importance, compared to the urgency of governance directly related to proper delivery of the aid. For Korea to further contribute to the global society as a leading donor, it has become essential to clearly elaborate its long-run ODA policy based on solid policy motives to support it.In this study, we revisit one of the most important intrinsic policy motives: the public awareness on development cooperation, and where it lies in Korea’s ODA. To elaborate the current status and potential roles of public opinion regarding the current ODA system, we conduct comparative analyses with other donors to define the main challenges for Korea. Furthermore, we conduct individual level empirical analyses using harmonized survey data accumulated over 11 years, and propose a strategy to enhance public awareness in Korea.In chapter 2, we first quantitatively assess the levels of correspondence between Korea’s ODA and public awareness. We find some economic outcomes agree with the public awareness on the economic importance of ODA. However, from other outcomes of our interest, such as scale, resource allocation, and policy goals, we find vast discrepancy between public perceptions of ODA and the actual administration of ODA programs. Thus, we raise the need for enhancing a strategy regarding public relations.In chapter 3, we present examples of a strong governance system and concrete strategy for public relations within other donor countries. We exemplify these public relations strategies in two categories: 1) channels to ensure public opinion is accurately reflected in ODA policy, such as coordination with the civil society, and 2) efforts to enhance the public awareness and understanding, such as Education for Sustainable Development (ESD).The first section presents a taxonomy on the ODA policy making process. We elaborate the role of each stakeholder, including the civil society, and how their voice contributes to ODA policy making. The recent reform in the British ODA system and its communication throughout the reform process exemplify the importance of public opinion in ODA policy.The second section of the chapter documents public awareness in the selected donor countries and their strategies. Their ODA institutes had a well established goal and curriculum. The curriculum was designed to provide an interactive learning opportunity on development cooperation, and various entities from both the public and private sector collaborate to provide such opportunities through formal and informal education. Public relation efforts through ESD strategies within these selected countries provide an important implication to Korea.Chapter 4 scrutinizes the current status of public awareness in Korea, based on 11 waves of individual level survey data. The first half of the chapter documents the dynamic pattern of public awareness, including level of support for ODA. While the aggregate level of support was not dramatically lower then those of the countries examined in Chapter 3, most of this support was composed of rather lukewarm support for Korea’s ODA contribution. This finding implies that high awareness and support from the public are less likely to be a result of strategic effort, and more likely to originate from the generosity and goodwill of the people.Based on the findings outlined above, the latter half of the chapter is devoted to discussing and suggesting a valid public awareness strategy for Korea. We exploit the results of our “Public Awareness for Development Cooperation Survey 2022,” designed and conducted specifically for this study. Underwhelmingly, we found lukewarm supporters tended to respond only to graphic descriptions of the hardships in developing countries designed for “emotional appeal.” However, we also identified an encouraging result on how even those lukewarm supporters with previous experience with ESD, as well as those who trust international organizations or partner countries, still respond to articles with “factual descriptions” of the current situation. Such a complementary effect shows how trust towards the partner country and global players provide the crucial social capital that the majority of the public lack of, and therefore should be slowly fostered by providing them with more opportunities for ESD. This finding echos with the survey result where 74% of our respondents answered they above all “wished to know whether Korean ODA did contribute to better lives in the recipient country.”This study illustrates the urgent need for Korea’s ODA to establish public trust. Such a challenge requires to be tackled by strengthening partnerships with the civil society, and substantiate the communication channels within Korea’s ODA governance system. Additionally, more ESD opportunities should be provided through both formal and informal education systems. While the government should take a strong initiative on designing detailed curriculum and mobilizing resources, cooperation between ministries and agencies is crucial, and a stronger partnership with resourceful private sector entities, such as CSOs, is likely to help effective implementation.
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